<PAGE>

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                 --------------

                                    FORM 10-Q

(Mark One)
              (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the Quarterly Period Ended September 30, 2001

                                       or

              ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

        For the transition period from                 to
                                       ---------------    ---------------

                         Commission File Number 0-30539

                                   TVIA, INC.

             (Exact name of registrant as specified in its charter)

           Delaware                                             77-0549628
           --------                                             ----------
(State or other jurisdiction of                              (I.R.S. employer
 incorporation or organization)                           identification number)

                4001 Burton Drive, Santa Clara, California 95054
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's telephone number, including area code: (408) 982-8588

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  X  No
                                              ---   ---

On October 31, 2001, 21,968,331 shares of the Registrant's Common Stock, $0.001
par value per share, were outstanding.

<PAGE>
                            TVIA, INC. AND SUBSIDIARY

                                    FORM 10-Q

                    QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                             Page
                                                                                                             ----
<C>      <S>                                                                                                 <C>
Part I:  Financial Information

Item 1:  Financial Statements

         Condensed Consolidated Balance Sheets at September 30, 2001 and March 31, 2001                         1

         Condensed Consolidated Statements of Operations for the Three and Six Months Ended
         September 30, 2001 and 2000                                                                            2

         Condensed Consolidated Statements of Cash Flows for the Six Months Ended
         September 30, 2001 and 2000                                                                            3

         Notes to Condensed Consolidated Financial Statements (Unaudited)                                       4

Item 2:  Management's Discussion and Analysis of Financial Condition and Results of Operations                  8

Item 3:  Quantitative and Qualitative Disclosures About Market Risk and Interest Rate Risk                     19

Part II: Other Information

Item 1:  Legal Proceedings                                                                                     20

Item 2:  Change in Securities and Use of Proceeds                                                              20

Item 3:  Default upon Senior Securities                                                                        20

Item 4:  Submission of Matters to Vote of Security Holders                                                     20

Item 5:  Other Information                                                                                     20

Item 6:  Exhibits and Reports on Form 8-K                                                                      21

Signature                                                                                                      21
</TABLE>

                                        i

<PAGE>

                          PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

                            TVIA, INC. AND SUBSIDIARY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                         SEPTEMBER 30,             MARCH 31,
                                                             2001                    2001
                                                         -------------             ---------
                                                          (Unaudited)
<S>                                                        <C>                     <C>
ASSETS
Current Assets:
    Cash and cash equivalents                              $  9,381                $ 21,267
    Short-term investments                                   30,905                  25,415
    Accounts receivable, net                                  1,251                   1,941
    Inventories                                               2,269                   4,343
    Other current assets and prepaid expenses                 1,597                   1,352
                                                           --------                --------
       Total current assets                                  45,403                  54,318

Property and Equipment, at cost:                              4,566                   3,507
       Less accumulated depreciation and amortization        (2,020)                 (1,533)
                                                           --------                --------
                                                              2,546                   1,974
Other Assets                                                  2,491                   1,143
                                                           --------                --------
         Total assets                                      $ 50,440                $ 57,435
                                                           ========                ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable                                      $  1,997                $  1,132
     Accrued liabilities and other                            1,810                   2,881
                                                           --------                --------
       Total current liabilities                              3,807                   4,013

Commitments and contingencies (Note 7)
Stockholders' Equity:
    Common stock                                                 22                      22
    Additional paid-in-capital                               91,141                  90,976
    Warrants to purchase common stock                         1,099                   1,099
    Deferred stock compensation                              (1,381)                 (2,167)
    Accumulated comprehensive income                            210                     148
    Accumulated deficit                                     (43,798)                (35,996)
    Treasury stock                                             (660)                   (660)
                                                           --------                --------
Total stockholders' equity                                   46,633                  53,422
                                                           --------                --------
Total liabilities and stockholders' equity                 $ 50,440                $ 57,435
                                                           ========                ========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.

                                        1

<PAGE>

                            TVIA, INC. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                    (in thousands, except per share amounts)

                                   (Unaudited)

<TABLE>
<CAPTION>
==================================================================================================
                                                       THREE MONTHS ENDED       SIX MONTHS ENDED
                                                         SEPTEMBER 30,            SEPTEMBER 30,
--------------------------------------------------------------------------------------------------

                                                        2001        2000        2001        2000
                                                      --------    --------    --------    --------
<S>                                                   <C>         <C>         <C>         <C>

Total revenues                                        $  3,515    $  4,331    $  5,978    $  7,864

Cost of revenues                                         1,917       2,267       5,528       4,143
                                                      --------    --------    --------    --------
     Gross profit                                        1,598       2,064         450       3,721

Operating expenses:
     Research and development                            3,254       1,670       5,912       2,924
     Sales, general and administrative                   1,312       1,258       2,633       2,246
     Amortization of deferred stock compensation           393         717         786       1,354
                                                      --------    --------    --------    --------

Total operating expenses                                 4,959       3,645       9,331       6,524
                                                      --------    --------    --------    --------
     Operating loss                                     (3,361)     (1,581)     (8,881)     (2,803)

Other income, net:
     Interest income                                       507         402       1,079         468
     Interest expense                                       --          --          --         (78)
     Amortization of debt guarantee costs and other         --         (82)         --        (327)
                                                      --------    --------    --------    --------

     Other income, net                                     507         320       1,079          63
                                                      --------    --------    --------    --------

     Net loss before extraordinary item                 (2,854)     (1,261)     (7,802)     (2,740)
     Extraordinary item, net of income taxes                --         672          --         672
                                                      --------    --------    --------    --------
     Net loss after extraordinary item                  (2,854)     (1,933)     (7,802)     (3,412)
                                                      --------    --------    --------    --------

Dividend related to convertible preferred stock             --          --          --        (671)
                                                      --------    --------    --------    --------

     Net loss attributable to common stockholders     $ (2,854)   $ (1,933)   $ (7,802)   $ (4,083)
                                                      ========    ========    ========    ========

Basic and diluted net loss attributable to
     common stockholders before extraordinary item    $  (0.13)   $  (0.09)   $  (0.36)   $  (0.38)
                                                      ========    ========    ========    ========
Basic and diluted net loss attributable to
     common stockholders after extraordinary item     $  (0.13)   $  (0.14)   $  (0.36)   $  (0.46)
                                                      ========    ========    ========    ========
Shares used in computing basic and diluted net loss
     attributable to common stockholders before and
     after extraordinary item                           21,551      13,557      21,512       8,929
                                                      ========    ========    ========    ========

--------------------------------------------------------------------------------------------------
</TABLE>
            See Notes to Condensed Consolidated Financial Statements.

                                        2

<PAGE>

                            TVIA, INC. AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED
                                                          SEPTEMBER 30,
                                                      --------------------
                                                           (Unaudited)

                                                        2001        2000
                                                      --------    --------
<S>                                                   <C>         <C>

Net cash used in operating activities                 $ (4,154)   $ (4,278)
                                                      --------    --------

Cash flows from investing activities:

       Purchases of available-for-sale investments      (5,490)         --
       Purchases of license technology                  (1,348)         --
       Purchases of property and equipment              (1,059)       (471)
                                                      --------    --------
          Net cash used in investing activities         (7,897)       (471)
                                                      --------    --------

Cash flows from financing activities:

       Proceeds from loans payable                          --         159
       Payments on loans payable                            --      (4,188)
       Proceeds from issuance of common stock              165      56,261
       Restricted funds from stock subscription for
          convertible preferred stock                       --       3,075
                                                      --------    --------

          Net cash provided by financing activities        165      55,307
                                                      --------    --------

(Decrease)/Increase in cash and cash equivalents       (11,886)     50,558

Cash and cash equivalents at beginning of period        21,267       3,789
                                                      --------    --------

Cash and cash equivalents at end of period            $  9,381    $ 54,347
                                                      ========    ========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.

                                        3

<PAGE>

                            TVIA, INC. AND SUBSIDIARY

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended September 30, 2001, are not
necessarily indicative of the results that may be expected for the fiscal year
ended March 31, 2002. The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements of Tvia, Inc. and subsidiary ("the Company") for the fiscal
year ended March 31, 2001, which are included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission on June 29, 2001.

      The balance sheet at March 31, 2001 has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.

NOTE 2 - SUMMARY OF SIGNIFICANT POLICIES

Consolidation

      The consolidated financial statements herein presented include the results
and financial position of Tvia and its wholly-owned subsidiary in China. The
functional currency of the Chinese subsidiary is the U.S. dollar; accordingly,
all gains and losses arising from foreign currency transactions in currencies
other than the U.S. dollar are included in the consolidated statements of
operations. All intercompany transactions and balances have been eliminated in
consolidation.

Cash and Cash Equivalents and Short-Term Investments

      The Company considers all highly liquid investment securities with
original maturities of three months or less from the date of purchase to be cash
and cash equivalents. Management determines the appropriate classification of
short-term investments at the time of purchase and evaluates such designations
as of each balance sheet date. To date, all short-term investments have been
classified as available-for-sale and are carried at fair value with unrealized
gains and losses, if any, included as a component of accumulated comprehensive
income in stockholders' equity, net of any related tax effects. Interest,
dividends and realized gains and losses are included in interest income in the
consolidated statements of operations. The value of the Company's investments by
major security type is as follows:

<TABLE>
<CAPTION>
                                                  As of September 30, 2001 (in thousands)
                                             -------------------------------------------------
                                                                 Aggregated
                                              Amortized             Fair            Unrealized
                                                Cost               Value               Gain
                                              ---------          ----------         ----------
<S>                                           <C>                <C>                 <C>

U.S. government and agency securities          $ 2,408            $ 2,417              $  9

U.S. corporate and bank debt                    28,287             28,488               201
                                               -------            -------              ----
                                               $30,695            $30,905              $210
                                               =======            =======              ====
</TABLE>

                                        4

<PAGE>

Revenue Recognition

      In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. The Company has reviewed its revenue recognition policies
and determined that they are in compliance with SAB 101. Accordingly, there was
no impact on the Company's financial statements from adopting SAB 101 in fiscal
2001.

      Revenue consists primarily of sales of products to original equipment
manufacturers ("OEMs") and distributors. Revenues from sales to OEMs are
recognized upon shipment. The Company has agreements with certain distributors
which do not contain rights of return and price protection rights. However, a
limited number of distributor agreements do contain rights to return slow moving
inventory or discontinued products held in inventory by the distributor which
has not sold through to an end user. The Company defers revenue recognition
relating to sales to all distributors until such products are sold through to
the end customer by the distributor, or if sell through information is not
available from the distributor, when cash is received from the distributor.
Receipts of cash from those distributors which do not provide sell through
information have historically been indicative of sell through to an end user by
that distributor. Management is currently not aware of any circumstances that
would require the return of cash to a distributor, once payment from a
distributor has been received.

      The Company also sells software development kits and application modules
to OEMs. The Company recognizes sales of software development kits and
application modules in accordance with the American Institute of Certified
Public Accountants Statement of Position 97-2 "Software Revenue Recognition"
("SOP 97-2"), as amended. Under SOP 97-2, software revenues are recognized when
an agreement has been executed or a definite purchase order has been received
and the product has been delivered, no significant obligations with regard to
implementation remain, the fee is fixed and determinable and collection is
probable. For each of the three and six months ended September 30, 2001 and
2000, revenues from the sale of software development kits and application
modules were less than 10% of net revenues.

Concentration of Credit Risk

      Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of bank deposits and accounts
receivable. The Company places its cash and cash equivalents in checking and
money market accounts in financial institutions and in short-term investment
securities. The Company's accounts receivable are derived primarily from sales
to OEMs and distributors. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential doubtful accounts.

Comprehensive Loss

      Comprehensive loss includes unrealized investment gains that have been
previously excluded from net loss and reflected instead as a component of
accumulated comprehensive loss in stockholders' equity. A summary of
comprehensive loss is as follows (in thousands):

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED     SIX MONTHS ENDED
                                                       SEPTEMBER 30,         SEPTEMBER 30,
                                                    ------------------    ------------------
                                                      2001       2000       2001       2000
                                                    -------    -------    -------    -------
<S>                                                 <C>        <C>        <C>        <C>

Net loss                                            $(2,854)   $(1,933)   $(7,802)   $(4,083)
Unrealized gain on available-for-sale investments        87         --         62         --
                                                    -------    -------    -------    -------
Comprehensive loss                                  $(2,767)   $(1,933)   $(7,740)   $(4,083)
                                                    =======    =======    =======    =======
</TABLE>

Recent Accounting Pronouncements

      In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Financial Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was
amended by SFAS No.138, "Accounting for Certain Derivative Financial Instruments
and Certain Hedging Activities", which amended or modified certain issues
discussed in SFAS No. 133. SFAS No. 138 is also effective for

                                        5

<PAGE>

all fiscal years beginning after June 15, 2000. SFAS No. 133 and SFAS No. 138
establish accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either as an asset or a liability
measured at its fair value. The statements also require that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company does not engage in derivative
instruments or hedging activities. Accordingly, there was no impact on the
Company's financial statements from the adoption of SFAS No. 133 and SFAS. 138.

      In July 2001, the FASB issued SFAS No. 141 and 142, "Business
Combinations" and "Goodwill and Other Intangibles". SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment, applying a fair-value based test.
Additionally, an acquired intangible asset should be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. Other
intangible assets will continue to be valued and amortized over their estimated
lives; in-process research and development will continue to be written off
immediately. The Company does not expect that the implementation of these
guidelines will have a material impact on its financial position or results of
operations.

      In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 establishes one
accounting model to be used for long-lived assets to be disposed of by sale, and
broadens the presentation of discontinued operations to include more disposal
operations. SFAS 144 supersedes both SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
and the accounting and reporting provisions of APB Opinion No. 30. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect the adoption of SFAS No. 144 to have a material impact on its
financial position or the results of its operations.

NOTE 3 - INVENTORIES

      Inventories are stated at the lower of cost (first-in, first-out) or
market value and include materials, labor and overhead. The Company periodically
evaluates the quantities on hand relative to current and historical selling
prices and historical and projected sales volume. Based on these evaluations,
provisions are made to reduce excess inventories down to their net realizable
value. Estimates of net realizable value can change in the near term.
Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                     September 30,      March 31,
                         2001             2001
                     -------------      ---------
<S>                  <C>                <C>

Raw material            $  290           $2,598
Work-in-process            867              243
Finished goods           1,112            1,502
                        ------           ------
                        $2,269           $4,343
                        ======           ======
</TABLE>

NOTE 4 - NET LOSS PER SHARE

      Net loss per share has been calculated in accordance with the FASB
Statement No. 128, "Earnings per Share" ("SFAS 128"). Basic net loss per share
is computed using the weighted average number of shares of common stock
outstanding. Diluted loss per share information is the same as basic net loss
per share since common shares issuable upon conversion of redeemable convertible
preferred stock, convertible preferred stock, stock options and warrants are
antidilutive.

                                        6

<PAGE>

      The following table sets forth the computation of basic and diluted net
loss per share attributable to common stockholders (in thousands except per
share amounts):

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED       SIX MONTHS ENDED
                                                           SEPTEMBER 30,           SEPTEMBER 30,
                                                       --------------------    --------------------
                                                         2001        2000        2001        2000
                                                       --------    --------    --------    --------
<S>                                                    <C>         <C>         <C>         <C>
Historical:
Net loss attributable to common stockholders           $ (2,854)   $ (1,933)   $ (7,802)   $ (4,083)

Basic and diluted:
  Weighted average shares of common stock
    outstanding                                          21,842      14,276      21,840       9,755
  Less: Weighted average shares of common
    stock subject to repurchase                            (291)       (719)       (328)       (826)
                                                       --------    --------    --------    --------
Weighted average shares used in computing
    basic and diluted net loss per share                 21,551      13,557      21,512       8,929
                                                       ========    ========    ========    ========

Basic and diluted net loss per share attributable to
    common stockholders                                $  (0.13)   $  (0.14)   $  (0.36)   $  (0.46)
                                                       ========    ========    ========    ========
</TABLE>

NOTE 5 - INCOME TAXES

      The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recorded or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

      As a result of the Company's continued losses, there was no provision for
income taxes for the three and six months ended September 30, 2001 and 2000.

NOTE 6 - SIGNIFICANT CUSTOMERS

      Revenues to significant distributors and customers, those representing
approximately 10% or more of total revenues for the respective periods, are
summarized as follows:

<TABLE>
<CAPTION>
                   THREE MONTHS ENDED         SIX MONTHS ENDED
                     SEPTEMBER 30,              SEPTEMBER 30,
                   ------------------        -----------------
                   2001         2000         2001         2000
                   ----         ----         ----         ----
<S>                <C>          <C>          <C>          <C>

Customer A          57%           *           48%           *
Customer B          25%          13%          20%           *
Customer C           *           25%           *           14%
Customer D           *           12%           *            *
Customer E           *           13%           *           11%
Customer F           *           12%           *            *
Customer G           *            *            *           18%
</TABLE>
(* = less than 10%)

The loss of one or more major distributors or customers could have a material
adverse effect on our business, financial condition and results of operations.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

      The Company is subject to various claims which arise in the normal course
of business. In the opinion of management, the Company is unaware of any claims
which would have a material adverse effect on the financial position, liquidity
or results of operations of the Company.

                                        7

<PAGE>

NOTE 8 - STOCK OPTION EXCHANGE OFFER

     In September 2001, the Company negotiated with certain employees for the
voluntarily exchange of certain stock options grants. These employees exchanged
certain of their existing options to purchase the Company's common stock for new
options to purchase an equal number of shares of the Company's common stock.
Approximately 621,528 options with a weighted-average exercise price of $7.26
were surrendered. During September 2001, those options were accepted and
cancelled by the Company. The Company will undertake to grant new stock options,
in lieu of the surrendered options, on a one-for-one basis to the employees. The
new options will not be granted until at least six months and one day after
acceptance of the old options for exchange and cancellation, and will not be
granted to any employee who terminates employment during that six-month period.
The exercise price of the new options will be the last reported trading price of
the Company's common stock on the grant date and will not be exercisable until
the employee has completed one year of service after the date of grant of the
new options.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited condensed
financial statements and notes thereto set forth in Item 1 of this report. The
statements contained in this report that are not purely historical are
forward-looking statements, including statements regarding our expectations,
beliefs, intentions, or strategies regarding the future. When used in this
discussion, the words "expects", "anticipates", "estimates" and similar
expressions are intended to identify forward-looking statements. These
statements relate to future periods and include statements as to expected
revenues, operating expenses, net loss, gross profit and loss; reasons for
decreased revenues and the slowdown of the interactive television industry; the
effect of certain accounting principles; uses and sufficiency or our available
cash, cash equivalents and short-term investments; reliance on original
equipment manufacturers; effect of changes in foreign currency exchange rates;
growth in operations; the ability to commercialize new technologies; the
performance and utility of products and services; ability to compete and
competitors; and anticipated uses of funds, are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, those
risks discussed below, as well as risks relating to as slower than anticipated
emergence of the interactive television market; the effect of the terrorist
attacks in the United States and any resulting conflicts or similar events
worldwide on our customers' demand of our products, general economic conditions
and specific conditions in the markets we address; dependence on a key customer;
the loss of a key customer; our ability to specify, develop or acquire,
complete, introduce, market and transition to volume production new products and
technologies in a timely manner; the volume of our product sales and pricing
concessions on volume sales; the qualification, availability and pricing of
competing products and technologies and the resulting effects on sales and
pricing of our products; fluctuations in the manufacturing yields of our third
party semiconductor foundries and other problems or delays in the fabrication,
assembly, testing or delivery of our products; changes in our products or
customer mix; the risk that excess inventory may result in write-offs, price
erosion and decreased demand; the level of orders received that can be shipped
in a fiscal quarter; the impact of foreign currency exchange rates; and the
matters discussed in "Factors that May Affect Results." These forward-looking
statements speak only as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based.

Overview

      We design, develop and market semiconductors for the broadband set-top
box, digital television and Internet enabled device markets. Our semiconductor
solutions process rich media content streams available from the Internet and
from television and enable consumers to have a customized and interactive
television viewing experience.

      We currently have two product families: the CyberPro 5000 family,
introduced in calendar year 1998; and the CyberPro 5300 family, introduced in
calendar year 1999. These product families currently generate most of our
revenues. We sell our products through three channels. First, we sell our
products directly to original equipment manufacturers, or OEMs, and recognize
revenues at the time of shipment to these OEMs. Second, we sell our products
through sales representatives who receive a commission. Finally, we sell our
products to a number of distributors who have contractual rights to earn a
negotiated margin on the sale of our products. We defer recognition of revenues
for sales to our distributors until payment is received or

                                        8

<PAGE>

until they have sold our products to end-users. We also generate revenues from
licensing software which we believe will continue to constitute a small
percentage of total revenues in the future.

      Approximately 37%, 39%, 93% and 85% of our total revenues for the three
and six months ended September 30, 2001 and 2000, respectively, were derived
from customers located outside the United States. All of our revenues to date
have been denominated in United States dollars. Historically, a relatively small
number of customers and distributors have accounted for a significant portion of
our product sales. Our top two customers accounted for 82% and 68% of total
revenues in the three and six months ended September 30, 2001, respectively. Our
top five customers, including distributors, accounted for 75% and 43% of total
revenues for the same periods ended September 30, 2000, respectively.

      Various factors have affected and may continue to affect our gross margin.
These factors include, but are not limited to, our product mix, the position of
our products in their respective life cycles, yields and the mix of our product
sales and development contracts and other revenues. For example, newly
introduced products generally have higher average selling prices and generate
higher gross margins. Both average selling prices and the related gross margins
typically decline over product life cycles due to competitive pressures and
volume price agreements. Our gross margin and operating results in the future
may continue to fluctuate as a result of these and other factors.

      The sales cycle for the test and evaluation of our products can range from
three months to nine months or more, with an additional three to nine months or
more before an OEM customer commences volume production of equipment
incorporating our products, if ever. Due to these lengthy sales cycles, we may
experience a delay between incurring operating expenses and inventory costs and
the generation of revenues from design wins.

      We have sustained losses on a quarterly and annual basis since inception.
As of September 30, 2001, we had an accumulated deficit of approximately $43.8
million. These losses resulted from significant costs incurred in the planning
and development of our technology and services and from significant marketing
costs.

      We have a subsidiary in the People's Republic of China which performs
research and development, and a branch office in Taiwan which is primarily
engaged in sales efforts.

Results of Operations

     The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue:

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED               SIX MONTHS ENDED
                                                            SEPTEMBER 30,                 SEPTEMBER 30,
                                                      ---------------------           ---------------------
                                                       2001           2000             2001           2000
                                                      -----           -----           ------          -----
<S>                                                   <C>             <C>              <C>            <C>
Revenues                                              100.0%          100.0%           100.0%         100.0%
Cost of revenues                                       54.5            52.3             92.5           52.7
                                                      -----           -----           ------          -----
Gross profit                                           45.5            47.7              7.5           47.3
Operating expenses:
Research and development                               92.6            38.6             98.9           37.2
Sales, general and administrative                      37.3            29.0             44.0           28.5
Amortization of deferred stock compensation            11.2            16.6             13.2           17.2
                                                      -----           -----           ------          -----
Total operating expenses                              141.1            84.2            156.1           82.9
                                                      -----           -----           ------          -----
Operating loss                                        (95.6)          (36.5)          (148.6)         (35.6)
Interest income                                        14.4             9.3             18.1            6.0
Interest expense                                         --              --               --           (1.0)
Amortization of debt guarantee costs and other           --            (1.9)              --           (4.2)
                                                      -----           -----           ------          -----
Other income, net                                      14.4             7.4             18.1            0.8
                                                      -----           -----           ------          -----
Net loss before extraordinary item                    (81.2)          (29.1)          (130.5)         (34.8)
Extraordinary item                                       --            15.5               --            8.5
                                                      -----           -----           ------          -----
Net loss after extraordinary item                     (81.2)%         (44.6)%         (130.5)%        (43.3)%
                                                      =====           =====           ======          =====
</TABLE>

      Revenues. Revenues decreased to $3.5 million and $6.0 million in the three
and six months ended September 30, 2001, respectively, compared to $4.3 million
and $7.9 million in the three and six months ended September 30, 2000,
respectively. The decreases were primarily due to a slower than anticipated
emergence of the interactive television market and to weak

                                        9

<PAGE>

general economic conditions. Revenues from two customers, Prediwave Corporation
and Motorola Broadband (formerly General Instruments, Inc.), accounted for 57%,
25%, 48% and 20%, of total revenues for the three and six months ended September
30, 2001, respectively. We anticipate that Prediwave Corporation and Motorola
Broadband will continue to be significant customers in the three months ended
December 31, 2001. Although Prediwave has not placed orders for our products
after the next quarter, we believe Prediwave will continue to be a significant
customer.

      Gross margin. Cost of goods sold in the three months ended September 30,
2001 was 54.5%, compared to 52.3% in the same period in fiscal 2001. The higher
cost of goods sold in the three months ended September 30, 2001 resulted
primarily from lower production yield issues on one of our product families.
Cost of goods sold in the six months ended September 30, 2001 was 92.5%,
compared to 52.7% in the same period in fiscal 2001. Cost of goods sold in the
six months ended September 30, 2001 included an inventory charge of $2.1 million
related to slow moving inventory impacted by the reduced revenue levels in the
interactive television market and in-transition inventory items within the 5000
product family. Excluding the inventory charge, gross margin decreased to 42.7%
in the six months ended September 30, 2001 from 47.3% in the same period ended
September 30, 2000. This decrease resulted primarily from unabsorbed overhead
and lower production yield issues on one of our product families. Many factors
affect our profit margin, including, but not limited to, our product mix, the
position of our products in their respective life cycles, yields and the mix of
our product sales and development contracts and other revenues.

      Research and development. Research and development expenses include
personnel and other costs associated with the development of product designs,
process technology, software and programming hardware. Our research and
development expenses reflect our continuing efforts to develop and bring to
market innovative and cost effective semiconductors that process the rich media
content available on the broadband network and the Internet. Research and
development expenses increased to $3.3 million and $5.9 million in the three and
six months ended September 30, 2001, respectively, from $1.7 million and $2.9
million in the three and six months ended September 30, 2000, respectively. The
increases in absolute dollars were primarily attributable to an increase in the
number of research and development personnel as compared to the same periods in
fiscal 2001, higher levels of depreciation resulting from the acquisition of
computers, lab equipment and software, and the expansion of our research and
development operation in the People's Republic of China. Our research and
development activities in the People's Republic of China provide software and
application specific integrated circuit development support to our domestic
operations. We employed 301 engineers and supporting staff in the People's
Republic of China at September 30, 2001. Research and development expenses as a
percentage of total revenues were 92.6% and 98.9% in the first three and six
months of fiscal 2002 compared to 38.6% and 37.2% in the same periods of fiscal
2001, respectively. The increase in research and development expenses as a
percentage of revenues in the three and six months ended September 30, 2001
compared to the same periods of fiscal 2001 is attributable to the decrease in
revenues between periods. In the next few quarters, we expect absolute research
and development expenses to stabilize with a small increase above the expense
level in the three months ended September 30, 2001.

      Sales, general and administrative. Sales, general and administrative
expenses consist primarily of personnel and other costs associated with the
management of our business and with the sale and marketing of our products.
Sales, general and administrative expenses were $1.3 million and $2.6 million in
the three and six months ended September 30, 2001, respectively, compared to
$1.3 million and $2.2 million in the three and six months ended September 30,
2000, respectively. The increase in the six months ended September 30, 2001 over
the same period in fiscal 2001 is primarily due to increased headcount,
including the expansion of our domestic and international sales force, the
building of our general and administrative infrastructure, and costs associated
to being a public company. Sales, general and administrative expenses as a
percentage of total revenues was 37.3% and 44.0% in the three and six months
ended September 30, 2001, respectively, compared to 29.0% and 28.5% in the same
periods of fiscal year 2001, respectively. The increase in sales, general and
administrative expenses as a percentage of revenues in the three and six months
ended September 30, 2001 compared to the same periods of fiscal 2001 is
attributable to the decrease in revenues between periods.

      Amortization of deferred stock compensation. We grant stock options to
hire, motivate and retain employees. We incurred stock compensation expense of
$393,000, $786,000, $717,000 and $1,354,000 in the three and six months ended
September 30, 2001 and 2000, respectively.

      Other income, net. Other income, net consists primarily of interest
income, interest expense and amortization of guarantee debt costs. Other income,
net was $507,000 and $1,079,000 for the three and six months ended September 30,
2001, respectively, compared to other income, net of $320,000 and $63,000 for
the three and six months ended September 30, 2000, respectively. Other income,
net generated in the three and six months ended September 30, 2001, was
primarily a result of interest earned from our investments which increased
significantly in fiscal 2001 as a result of our initial public offering in
August 2000, and to a lesser extent, the repayment of our outstanding debt,
partially offset by amortization of guarantee debt. Other income, net, in the
three and six months ended September 30, 2000 consisted of interest income,
partially offset by the

                                       10

<PAGE>

amortization of deferred compensation related to warrants and options issued to
guarantors of our debt, and interest expense on this debt.

      Provision for income taxes. We are taxed in our jurisdictions of
operations based on the extent of taxable income generated in each jurisdiction.
For income tax purposes, revenues are attributed to the taxable jurisdiction
where the sales transactions generating the revenues were initiated. We incurred
operating losses in the three and six months ended September 30, 2001 and 2000,
and therefore made no provision for income tax in these periods.

      Preferred stock dividend. During the six months ended September 30, 2000,
we recorded a preferred stock dividend of $671,000 representing the value of the
beneficial conversion feature on the issuance of convertible preferred stock in
April 2000. The beneficial conversion was calculated based on the difference
between the conversion price of $7.50 per share and the estimated fair value of
the common stock at that date.

Liquidity and Capital Resources

      During the six months ended September 30, 2001, we used $4.2 million of
cash and cash equivalents in our operating activities as compared to $4.3
million during the six months ended September 30, 2000. The improvement in cash
usage was mainly due to a significant decrease in receivables during the six
months ended September 30, 2001 as compared to the six months ended September
30, 2000.

      Technology acquisitions and capital equipment purchases in the six months
ended September 30, 2001 totaled $1.3 million and $1.1 million, respectively,
compared to none and $471,000 in the six months ended September 30, 2000,
respectively.

      At September 30, 2001, our principal source of liquidity consisted of cash
and cash equivalents and short-term investments totaling $40.3 million. Working
capital at September 30, 2001 was $41.6 million.

      Based on our current expectations, we believe that our cash and cash
equivalents and short-term investment balances will be sufficient to meet our
working capital and capital requirements through the next twelve months. We may
utilize cash to acquire or invest in complementary businesses or to obtain the
use of complementary technologies.

Inflation

      The impact of inflation on our business has not been material for the
periods ended September 30, 2001 and 2000.

Recent Accounting Pronouncements

      In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Financial Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133," which amends SFAS No. 133 to be effective for all
fiscal years beginning after June 15, 2000. In June 2000, SFAS No. 133 was
amended by SFAS No.138, "Accounting for Certain Derivative Financial Instruments
and Certain Hedging Activities", which amended or modified certain issues
discussed in SFAS No. 133. SFAS No. 138 is also effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133 and SFAS No. 138 establish
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either as an asset or a liability measured at
its fair value. The statements also require that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company does not engage in derivative instruments or
hedging activities. Accordingly, there was no impact on the Company's financial
statements from the adoption of SFAS No. 133 and SFAS. 138.

      In July 2001, the FASB issued SFAS No.'s 141 and 142, "Business
Combinations" and "Goodwill and Other Intangibles". SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment, applying a fair-value based test.
Additionally, an acquired intangible asset should be separately recognized if
the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. Other
intangible assets will continue to be valued and amortized over their estimated
lives; in-process research and development will continue to be written off
immediately. The Company does not expect that the implementation of these
guidelines will have a material impact on its financial position or results of
operations.

                                       11

<PAGE>

      In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 establishes one
accounting model to be used for long-lived assets to be disposed of by sale, and
broadens the presentation of discontinued operations to include more disposal
operations. SFAS 144 supersedes both SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
and the accounting and reporting provisions of APB Opinion No. 30. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect the adoption of SFAS No. 144 to have a material impact on its
financial position or the results of its operations.

Factors that May Affect Future Results

We expect continuing losses and may not achieve profitability which could affect
our ability to expand our business.

      We have incurred significant operating losses in each year since our
inception and expect to continue to incur net losses for the foreseeable future,
primarily as a result of expenses for research and development. Our losses
increased as we transitioned our focus away from the personal computer market
toward the broadband set-top box, digital television and Internet enabled device
markets in 1996. We have incurred net losses of approximately $43.8 million from
our inception in March 1993 through September 30, 2001. If we continue to incur
net losses, we may not be able to expand our business as quickly as we would
like. We do not know when or if we will become profitable and if we do become
profitable, we may not be able to sustain or increase our profitability.

Our operating expenses will increase as we build our business and these
increased expenses may impact our ability to become profitable.

      We have made substantial expenditures on research and development and
organizational infrastructure consisting of an executive team, finance, sales,
marketing and management information systems departments and our design center
located in the People's Republic of China. For the fiscal years ended March 31,
2001, 2000, 1999 and for the three and six months ended September 30, 2001,
research and development expenses represented 50.4%, 48.0%, 220.6%, 92.6% and
98.9% of our revenues, respectively. We expect to continue to spend substantial
financial and other resources on developing and introducing new products and
services, and on expanding our research and development. We expect that our
operating expenses will continue to increase in absolute dollars and may
increase as a percentage of revenues. If our revenues do not increase, our
business and results of operations could suffer. We base our expense levels in
part on our expectations regarding future revenues. If our revenues for a
particular quarter are lower than we expect, we may be unable to proportionately
reduce our operating expenses for that quarter.

Because the emergence of the interactive television market has been slower than
anticipated, we may not be able to sell our products or sustain our business.

      Our semiconductor solutions are incorporated into products that allow
interactive television. The concept of interactive television and the market for
products that facilitate it are new and developing. As a result, our profit
potential is unproven and may never materialize. Broad acceptance of broadband
set-top boxes, digital televisions and Internet enabled devices will depend on
the extent to which consumers use devices other than personal computers to
access the Internet. To date, the market for these products has not developed as
quickly as our customers and we had previously anticipated. Consequently,
certain of our customers have significant inventory of our semiconductors or
products that incorporate our semiconductors, thereby limiting the opportunity
to sell additional semiconductors to these customers until their present
inventories are depleted. Our success will also depend on the ability of OEMs
and service providers that work with our OEMs to create demand for and market
the products incorporating our semiconductors. Unless a sufficiently large
market for broadband set-top boxes, digital televisions, Internet enabled
devices and other products that are used for interactive television develops,
demand for products incorporating our semiconductor solutions may not be
sufficient to sustain our business.

A significant amount of our revenues comes from two customers and any decrease
in revenues from these customers could significantly impact our financial
results.

      Historically we have been, and we expect to continue to be, dependent on a
relatively small number of OEMs for a significant portion of our total revenues.
Sales to Prediwave Corporation and Motorola Broadband, OEMs, accounted for
approximately 57%, 25%, 48% and 20% of our total revenues for the three and six
months ended September 30, 2001, respectively. In the three months ended
September 30, 2000, Fullerton Technology Co., Ltd. and Kanematsu Semiconductor
Corp., distributors, Philips Industries, Inc, Flextronics International, Ltd.
and Motorola Broadband, OEMs, accounted for 25%, 12%, 13%, 12% and 12% of total
revenues, respectively. In the six months ended September 30, 2000, Weikeng
Industries,

                                       12

<PAGE>

Inc. and Fullerton Technology Co., Ltd, distributors, and Philips Industries,
Inc., an OEM, accounted for 18%, 14% and 11% of our total revenues,
respectively. We may not be able to retain our two largest customers or to
obtain additional key accounts. Prediwave, one of our largest customers, has not
placed an order for delivery of our products after the next quarter. While we
expect that Prediwave will place orders for additional products, any reduction
or delay in sales of our products to Prediwave or another key customer or our
inability to successfully develop relationships with additional key customers
could negatively impact our financial results.

Customers may cancel or defer significant purchase orders, or our distributors
may return our products, which would cause our inventory levels to increase and
our revenues to decline.

      We sell our products on a purchase order basis through our direct sales
channel, sales representatives and distributors, and our customers may cancel or
defer purchase orders at any time with little or no penalty. We recognize
revenues from sales to our distributors when they have sold our products to
their customers. We recognize revenues on sales to our OEM customers when we
ship our products to the OEM. We generally permit our distributors to return
products to us. If our customers cancel or defer significant purchase orders or
our distributors return our products, our inventories would increase and our
revenues would decrease, which would materially harm our business as increases
in inventory reserves could be required. Refusal of OEM customers to accept
shipped products or delays or difficulties in collecting accounts receivable
could have an adverse effect on our business.

Because of our long product development process and sales cycle, we incur
substantial expenses before we generate revenues and may not recover our
expenditures.

      To develop market acceptance of our products, we must dedicate significant
resources to research and development, production and sales and marketing. We
develop products based on forecasts of demand and we incur substantial product
development expenditures prior to generating associated revenues. Our customers
typically perform numerous tests and extensively evaluate our products before
incorporating them into their systems. The time required for testing, evaluating
and designing our products into a customer's equipment can take up to nine
months or more, with an additional three to nine months or more before an OEM
customer commences volume production of equipment incorporating our products, if
ever. Because of this lengthy development cycle, we may experience a delay
between the time we accrue expenses for research and development and sales and
marketing efforts and the time when we generate revenues, if any.

      Furthermore, achieving a design win with a customer does not necessarily
mean that this customer will order large volumes of our products. A design win
is not a binding commitment by a customer to purchase our products. Rather, it
is a decision by a customer to use our products in the design process. In
addition, our customers can choose at any time to discontinue using our products
in that customer's designs or product development efforts. If our products are
chosen to be incorporated into a customer's products, we may still not realize
significant revenues from that customer if that customer's products are not
commercially successful. As a result, our profitability from quarter to quarter
and from year to year may be materially affected by the number and timing of our
new product introductions in any period and the level of acceptance gained by
these products.

If we fail to successfully develop, introduce and sell new products, we may be
unable to effectively compete in the future.

      We operate in a highly competitive, quickly changing environment marked by
new and emerging products and technologies. Our success depends on our ability
to develop, introduce and successfully market new products and enhance our
existing products in the broadband set-top box, digital television and Internet
enabled device markets. The development of these new products is highly complex
and, from time to time, we have experienced delays in completing their
development and introduction. Any one of the following factors could affect our
ability to develop, introduce and sell new products and could materially harm
our business:

      o   our failure to complete new product designs in a timely manner;

      o   our inability to manufacture our new products according to design
          specifications;

      o   our inability to deliver our products to our customers in a timely
          manner for any reason, including a lack of manufacturing capacity or
          the failure of our contracted foundries to meet targeted manufacturing
          yields; and

      o   our sales force's and independent distributors' inability to create
          adequate demand for our products.

                                       13

<PAGE>

Our future operating results are likely to fluctuate and may fail to meet
expectations which could cause our stock price to decline.

      Our operating results have varied in the past and are likely to do so in
the future as we attempt to meet consumer demand in the emerging markets for
broadband set-top boxes, digital televisions and Internet enabled devices. Our
future operating results will depend on many factors and may fail to meet our
expectations for a number of reasons. Any failure to meet these expectations or
those of securities analysts and investors could cause our stock price to
fluctuate or decline significantly. A number of factors, including those listed
below, may cause fluctuations in our operating results and stock price:

      o   the general condition in the semiconductor industry market;

      o   fluctuations in the volume of product sales, changes in product mix
          and pricing concessions on sales;

      o   the timing, rescheduling or cancellation of significant customer
          orders;

      o   the timing of investments in, and the results of, research and
          development;

      o   changes in industry standards;

      o   introduction of interactive television services by service providers;

      o   availability of manufacturing capacity and raw materials;

      o   product introductions and price changes by our competitors;

      o   our ability to specify, develop, introduce and market new products
          with smaller geometries, more features and higher levels of design
          integration in accordance with design requirements and design cycles;

      o   the level of orders received that can be shipped in a given period;

      o   changes in earning estimates or investment recommendations by
          analysts;

      o   changes in investors perceptions; and

      o   the effect of the terrorist attacks in the United States and any
          related conflicts or similar events worldwide.

Our industry is highly competitive, and we cannot assure you that we will be
able to effectively compete.

      The market for broadband set-top boxes, digital televisions and Internet
enabled devices in particular, and the semiconductor industry in general, are
highly competitive. We compete with a number of domestic and international
suppliers of semiconductors in our targeted markets. We expect competition to
intensify as current competitors expand their product offerings and new
competitors enter our targeted markets. We believe that we must compete on the
basis of a variety of factors, including:

      o   functionality;

      o   performance;

      o   time to market;

      o   price;

      o   conformity to industry standards;

      o   product road maps; and

      o   technical support.

                                       14

<PAGE>

      We currently compete with ATI Technologies, Inc., Broadcom Corporation,
and TeraLogic, Inc. In addition to these competitors, we expect other major
semiconductor manufacturers will enter our targeted markets as the broadband
set-top box, digital television and Internet enabled device markets become more
established. A number of companies, including International Business Machines
Corporation, STMicroelectronics N.V., National Semiconductor Corporation,
Equator Technologies, Inc. and TeleCruz Technology, Inc., have announced that
they are developing or plan to introduce competing products in the broadband
set-top box, digital television and Internet enabled markets which could result
in significant competition.

      Some of our current and potential competitors operate their own
fabrication facilities or have a longer operating history and significantly
greater financial, sales and marketing resources. They may also have preexisting
relationships with our customers or potential customers. As a result, these
competitors may be able to adapt more quickly to new or emerging products,
develop new technologies, or address changes in customer requirements or devote
greater resources to the development and promotion of strategic relationships
among themselves or with existing or potential customers. It is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. Increased competition could harm our business, results
of operations and financial condition by, for example, increasing pressure on
our profit margin or causing us to lose sales opportunities.

We depend on two independent foundries to manufacture our products based on our
forecasts, which could result in an oversupply or undersupply of products.

      We do not own or operate our own fabrication facility. We currently depend
upon two outside foundries, Taiwan Semiconductor Manufacturing Corporation, or
TSMC, and United Manufacturing Corporation, or UMC. We do not have long term
supply agreements with these foundries to manufacture our semiconductor
products. Both of these foundries are located in Taiwan and each has limited
manufacturing capacity.

      The foundries require us to provide forecasts of our anticipated
manufacturing orders in advance of receiving purchase orders from our customers.
This may result in product shortages or excess product inventory. Obtaining
additional supply in the face of product shortages may be costly or not
possible, especially in the short term. Our failure to adequately forecast
demand for our products would materially harm our business. The foundries may
allocate capacity to the production of other companies' products while reducing
delivery to us on short notice.

We may encounter periods of semiconductor oversupply, resulting in pricing
pressure, as well as undersupply, resulting in a risk that we could be unable to
fulfill our customers' requirements.

      The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products. These fluctuations
have resulted in circumstances when supply and demand for the industry's
products have been widely out of balance. Our operating results may be
materially harmed by industry wide semiconductor oversupply, which could result
in severe pricing pressure or inventory write-downs. On the other hand, in a
market with undersupply, we would have to compete with larger companies for
limited manufacturing capacity. If material shortages occur, we may incur
additional costs to procure the scarce components or be unable to have our
products manufactured in a timely manner or in quantities necessary to meet our
requirements. Since we outsource all of our manufacturing, we are particularly
vulnerable to supply shortages. As a result, we may be unable to fill orders and
may lose customers. Any future industry wide oversupply or undersupply of
semiconductors would materially harm our business and have a negative impact on
our earnings.

If we have to qualify new independent foundries for any of our products and do
not have sufficient supply of our products on hand, we may lose revenues and
damage our customer relationships.

      Processes used to manufacture our products are complex, customized to our
specifications and can only be performed by a limited number of manufacturing
facilities. The foundries we use have from time to time experienced lower than
anticipated manufacturing yields, particularly in connection with the
introduction of new products and the installation and start up of new process
technologies. In the six months ended September 30, 2001, our gross margin
decreased in part to unabsorbed overhead and lower production yields on one of
our product families. In addition, the foundries we use are located in a
seismically active area, and earthquakes have caused these foundries to close
for repairs, resulting in a delay in manufacturing our products.

      Although we primarily utilize two independent foundries, most of our
components are not manufactured at both foundries at any given time. The
inability of one of the foundries to provide components could result in
significant delays and harm our business. In the event either foundry
experienced manufacturing or financial difficulties or suffered any damage or
destruction

                                       15

<PAGE>

to its facilities, or in the event of any other disruption of foundry capacity,
we may not be able to qualify alternative manufacturing sources for existing or
new products in a timely manner. For example, in September 1999, Taiwan
experienced a major earthquake. The earthquake and its resulting aftershocks
caused power outages and significant damage to Taiwan's infrastructure.
Similarly, in September 2001, a typhoon hit Taiwan causing businesses in Taipei
and the financial markets to close for two days. In addition, as a result of the
rapid growth of the semiconductor industry based in the industrial park where
both foundries are located, severe constraints have been placed on the water and
electricity supply in that region. Any shortages of water or electricity or a
natural disaster could adversely affect these foundries' ability to supply our
products, which could have a material adverse effect on our operating results.

      Even our current outside foundries would need to have manufacturing
processes qualified in the event of a disruption at the other foundry, which we
may not be able to accomplish in a timely manner sufficient to prevent an
interruption in the supply of the affected products. We cannot assure you that
any existing or new foundries would be able to produce integrated circuits with
acceptable manufacturing yields in the future, or will continue to have
sufficient capacity to meet our needs. If our manufacturing requirements are not
satisfied, our business would be materially harmed.

Our semiconductors are complex to manufacture and may have errors or defects
which could be costly to correct.

      The manufacture of semiconductors is a complex process. Foundries may not
achieve acceptable product yields from time to time due to the complexity of the
integrated circuit design, inadequate manufacturing processes and other reasons.
We refer to the proportion of final acceptable integrated circuits that have
been processed, assembled and tested relative to the gross number of integrated
circuits that could have been produced from the raw materials as our product
yields. Identifying defects and determining the reason for low yields may be
discovered after production has begun and at various stages of the production
cycle. In the six months ended September 30, 2001, our gross margin decreased in
part to unabsorbed overhead and lower production yields on one of our product
families. Our failure to discover defects early in the production cycle will
result in higher costs and may require a diversion of our technical personnel
and resources away from product development in order to correct the defect. In
addition, defective products that have been released into the market and
distributed to our customers and end users may result in harm to our reputation,
significant warranty costs, diversion of our technical and managerial resources
and potential product liability claims that would be costly to defend.

Our software is complex and may have bugs or defects which could be costly to
correct.

      Our products depend on complex software that we develop internally and
license from others. Complex software often contains defects, particularly when
first introduced or when new versions are released. Determining whether our
software has defects may occur after our products are released into the market
and distributed to our customers and end users, and may result in harm to our
reputation, significant warranty costs, diversion of our technical resources and
potential product liability claims that would be costly to defend and divert
managerial resources.

We face foreign business, political and economic risks because a majority of our
sales are to customers outside of the United States.

      Sales of our products to our OEM customers and to distributors located
outside the United States accounted for 67%, 71%, 81%, 37% and 39% of our total
revenues in fiscal years 2001, 2000, 1999 and for the three and six months ended
September 30, 2001, respectively. We anticipate that sales to customers located
outside the United States will continue to represent a significant portion of
our total sales in future periods. In addition, many of our domestic customers
sell their products outside of North America, thereby indirectly exposing us to
risks associated with foreign commerce. Asian economic instability impacts the
sales of products manufactured by our customers, as does the Chinese New Year,
during which time many manufacturers and businesses close their operations. We
could also experience greater difficulties collecting accounts receivable from
customers outside of the United States. Accordingly, our operations and revenues
are subject to a number of risks associated with foreign commerce.

      To date, we have denominated sales of our products in foreign countries
exclusively in United States dollars. As a result, any increase in the value of
the United States dollar relative to the local currency of a foreign country
will increase the price of our products in that country so that our products
become relatively more expensive to customers in the local currency of that
foreign country. As a result, sales of our products in that foreign country may
decline. To the extent any of these types of risks materialize, our business
would be materially harmed.

                                       16

<PAGE>

If the industries into which we sell our products experience recession or other
cyclical effects impacting our customers' budgets, our operating results could
be negatively impacted.

      The primary customers for our products are companies in the broadband
set-top box, digital television and Internet enabled device markets. Any
significant downturn in these particular markets or in general economic
conditions which result in the cutback of research and development budgets or
capital expenditures would likely result in the reduction in demand for our
products and services and could harm our business. For example, the United
States economy, including the semiconductor industry, is currently experiencing
a slowdown, which may negatively impact our business and operating results. Some
analysts have predicted that a further decline in the United States economy will
result from the terrorist attacks in the United States war. If the economy
continues to decline as a result of the recent economic, political and social
turmoil, existing and perspective customers may reduce their design budgets or
delay implementation of our products, which could harm our business and
operating results.

      In addition, the markets of semiconductor products are cyclical. In recent
years, some Asian countries have experienced significant economic difficulties,
including devaluation and instability business failures and a depressed business
environment. These difficulties triggered a significant downturn in the
semiconductor market, resulting in reduced budgets for chip design tools. In
addition, the electronics industry has historically been subject to seasonal and
cyclical fluctuations in demand for its products, and this trend may continue in
the future. These industry downturns have been, and my continue to be,
characterized by diminished product demand, excess manufacturing capacity and
subsequent erosion of average selling prices. As a result, our future operating
results may reflect substantial fluctuations from period to period as a
consequence of these industry patterns, general economic conditions affecting
the timing of orders from customers and other factors. Any negative factors
affecting the semiconductor industry, including the downturns described here,
could significantly harm our business, financial condition and results of
operations.

The rapid growth of our business and operations has strained and may continue to
strain our administrative, operational and financial resources, and our failure
to manage our future growth could affect our operations and our future ability
to expand.

      We have in the past and may in the future experience rapid growth and
expansion in our business and operations. Our growth has placed, and may
continue to place, a significant strain on our administrative, operational and
financial resources and increased demands on our systems and controls. Our
future growth may require the implementation of a variety of new and upgraded
operational and financial systems, procedures and controls, including
improvement of our accounting and other internal management systems, all of
which may require substantial managerial effort. We cannot assure you that these
efforts would be accomplished successfully. Our growth has resulted in a
continuing increase in the level of responsibility for both existing and new
management personnel, and may require that we recruit, hire and train a
substantial number of new personnel. Our failure to manage our past and future
growth could prevent us from successfully achieving market acceptance for our
products, disrupt our operations, delay our expansion and harm our business.

We depend on key personnel, the loss of whom would impair or inhibit the growth
of our business.

      Our success depends on the skills, experience and performance of our
executive officers and other key management and technical personnel, many of
whom would be difficult to replace. We are particularly dependent on Kenny Liu,
our Chairman and Chief Executive Officer, and Jack Guedj, our President. The
competition for employees with these skills is intense, particularly in the San
Francisco Bay Area, and we may not be able to attract and retain a sufficient
number of such qualified new personnel in the future. The loss of the service of
one or more of our key employees, or our failure to attract, retain and motivate
qualified personnel would inhibit the growth of our business.

We rely on strategic relationships to commercialize our products, and these
relationships may require that we expend significant resources without
guarantees that our endeavors will be profitable.

      We rely on strategic relationships with some of our customers who we
believe are the market leaders in our target markets. These relationships often
involve the proposed development by us of new products involving significant
technological challenges. Since the proposed products under development may
offer potential competitive advantages to our customers, considerable pressure
is frequently placed on us to meet development schedules. While an essential
element of our strategy involves establishing such relationships, these projects
require substantial amounts of our limited resources, with no guarantee of
revenues to us, and could materially detract from or delay the completion of
other important development projects. Delays in development could impair the
relationship between our customers and us and negatively impact sales of the
products under development. Moreover, our customers may develop their own
solutions for products currently supplied by us, which could have an adverse
effect on our business.

                                       17

<PAGE>

We depend on third party subcontractors for assembly of our semiconductors which
reduces our control over the delivery, quantity, quality, or cost of our
products.

      Substantially all of our products are assembled by one of two
subcontractors, both of which are located in Taiwan. Typically, we procure
services from these subcontractors on a purchase order basis. Their availability
to assemble our products could be adversely affected if either subcontractor
experiences financial difficulties or suffers any damage or destruction to its
facilities or any other disruption of its assembly capacity. Because we rely on
third party subcontractors for assembly of our products, we cannot directly
control product delivery schedules. We have experienced in the past, and may
experience in the future, product shortages or quality assurance problems that
could increase the cost of manufacturing or testing of our products. It is time
consuming and difficult to find and qualify alternative assemblers. If we are
forced to find substitute subcontractors, shipments of our products could be
delayed. Any problems associated with the delivery, quantity or cost of our
products could harm our business.

Political instability in the People's Republic of China or Taiwan could harm our
manufacturing and research and development capabilities and negatively impact
our product sales.

      We operate our research and development facility in the People's Republic
of China. In addition, almost all of our products are manufactured and assembled
outside of the United States at facilities operated by third parties in Taiwan.
The political and economic conditions in the region, including the People's
Republic of China's dispute with Taiwan, may adversely impact our operations
including manufacture and assembly of our products and research and development
efforts. We cannot assure you that restrictive laws or policies on the part of
either the People's Republic of China or the United States will not constrain
our ability to operate in both countries. If we are required to relocate our
facilities, our business will be disrupted and our costs associated with
research and development will increase.

If our competitors use our intellectual property and proprietary rights, our
ability to compete would be impaired.

      Our success depends in part upon our rights in proprietary technology and
processes that we develop and license from, and to, others. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality agreements with our employees, consultants and strategic
partners in order to protect proprietary technologies that use our products. We
cannot assure you that these measures will provide meaningful protection for our
proprietary technologies and processes, and they do not prevent independent
third party development of competitive products. In addition, it is difficult to
monitor unauthorized use of technology, particularly in foreign countries where
laws may not protect our proprietary rights as fully as in the United States.

      We currently have patent applications pending in the United States, and we
may seek additional patents in the future. Because the content of patent
applications in the United States is not publicly disclosed until the patent is
issued, applications may have been filed which relate to our products or
processes. We cannot assure you that our current patent applications or any
future patent applications will result in a patent being issued with the scope
of the claims we seek, if at all, or whether any patents we have or may receive
will be challenged or invalidated. The failure of any patents to provide
protection to our technology would make it easier for our competitors to offer
similar products.

We may face intellectual property infringement claims that could be costly and
could result in the loss of proprietary rights which are necessary to our
business.

      Other parties may assert patent infringement claims against us, including
claims against technology that we license from others, and our products or
processes may infringe issued patents of others. Litigation is common in the
semiconductor industry and any litigation could result in significant expense to
us. Litigation would also divert the efforts of our technical and management
personnel, whether or not the litigation is determined in our favor. Litigation
could also require us to develop non-infringing technology or enter into royalty
or license agreements. These royalty or license agreements may not be available
on acceptable terms, including limitations on representations and warranties
regarding infringement and indemnification in the event of infringement claims.
Our failure or inability to develop non-infringing technology, license the
proprietary rights on a timely basis or receive appropriate protection on
licensed technology would harm our business.

                                       18

<PAGE>

Regulation of our customers' products may slow the process of introducing new
products and could impair our ability to compete.

      The Federal Communications Commission, or the FCC, has broad jurisdiction
over our target markets. Various international entities or organizations may
also regulate aspects of our business or the business of our customers. Although
our products are not directly subject to regulation by any agency, the
transmission pipes, as well as much of the equipment into which our products are
incorporated, are subject to direct government regulation. For example, before
they can be sold in the United States, broadband set-top boxes, digital
televisions and Internet enabled devices, must be tested and certified by
Underwriters Laboratories and meet FCC regulations. Accordingly, the effects of
regulation on our customers or the industries in which our customers operate
may, in turn, harm our business. FCC regulatory policies affecting the ability
of cable operators or telephone companies to offer certain services and other
terms on which these companies conduct their business may impede sales of our
products. In addition, our business may also be adversely affected by the
imposition of tariffs, duties and other import restrictions on systems of
suppliers or by the imposition of export restrictions on products that we sell
internationally. Changes in current laws or regulations or the imposition of new
laws or regulations in the United States or elsewhere could harm our business.

We may experience power blackouts and higher electricity prices as a result of
California's current energy crisis, which could disrupt our operations and
increase our expenses.

      California is in the midst of an energy crisis that could disrupt our
manufacturing operations and increase our expenses. We rely on the major
Northern California public utility, Pacific Gas & Electric Company, or PG&E, to
supply electric power to our facilities in Northern California. Due to problems
associated with the deregulation of the power industry in California and
shortages in wholesale electricity supplies, customers of PG&E have been faced
with increased electricity prices, power shortages and rolling blackouts.
Increased energy prices will increase our expenses which will increase our cost
of revenues and decrease our gross profits. If blackouts interrupt our power
supply, we may be temporarily unable to continue operations at our California
facilities. Any such interruption in our operations could delay our ability to
develop new products, or to do the final testing on our products. Also, such
disruptions could damage our reputation and result in lost revenue, either of
which could substantially harm our business and results of operations

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AND INTEREST
        RATE RISK

Quantitative and Qualitative Discussion of Market Interest Rate Risk

      Our cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and, in the future, the fair market value of our investments. We manage
the exposure to financial market risk by performing ongoing evaluations of our
investment portfolio and presently invest entirely in short term investment
grade government and corporate securities. These securities will be highly
liquid and generally mature within 12 months from the purchase date. Due to the
short maturities of our investments, the carrying value should approximate the
fair value. In addition, we do not use our investments for trading or other
speculative purposes. We have performed an analysis to assess the potential
effect of reasonably possible near term changes in interest and foreign currency
exchange rates. The effect of any change in foreign currency exchange rates is
not expected to be material to our results of operations, cash flows or
financial condition. Due to the short duration of our investment portfolio, an
immediate 10% change in interest rates would not have a material effect on the
fair market value of our portfolio. Therefore, we would not expect our operating
results or cash flows to be affected to any significant degree by the effect of
a sudden change in market interest rates on our securities portfolio.

Foreign Currency Exchange Risk

      We are an international company, selling our products globally and, in
particular, in Japan, Korea, the People's Republic of China and Taiwan. Although
we transact our business in United States dollars, we cannot assure you that
future fluctuations in the value of the United States dollar will not affect the
competitiveness of our products, gross profits realized, and results of
operations. Further, we incur expenses in the People's Republic of China, Taiwan
and other countries that are denominated in currencies other than United States
dollars. We cannot estimate the effect that an immediate 10% change in foreign
currency exchange rates would have on our future operating results or cash flows
as a direct result of changes in exchange rate. However, we do not believe that
we currently have any significant direct foreign currency exchange rate risk and
have not hedged exposures denominated in foreign currencies or any derivative
financial instruments.

                                       19

<PAGE>

                           PART II: OTHER INFORMATION

ITEM 1:     LEGAL PROCEEDINGS

                    None

ITEM 2:     CHANGES IN SECURITIES AND USE OF PROCEEDS

                    None

ITEM 3:     DEFAULT UPON SENIOR SECURITIES

                    None

ITEM 4:     SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

          On August 21, 2001, we held our 2001 Annual Meeting of Stockholders at
          which our stockholders approved the following:

   (a)      Election of the two Class I directors to serve until the 2004 Annual
            Meeting of Stockholders and thereafter until their successors are
            elected and qualified:

                                    For              Withheld
                                    ---              --------
              David Dicioccio       14,213,363       328,700
              Eli Porat             14,216,063       326,000

   (b)      An amendment of our Amended and Restated 2000 Stock Incentive Plan
            to increase the number of stock options granted annually to each
            non-employee director from 7,500 shares to 10,000 shares and to
            change the vesting schedule for options granted to non-employee
            directors from 5 years to 24 months:

                                    For              Against           Abstain
                                    ---              -------           -------

                                    14,359,214       174,659           8,190

   (c)      An amendment to our Amended and Restated 2000 Stock Incentive Plan
            to increase the number of shares automatically made available for
            issuance under the Plan on January 1 of each year from 73,000
            shares to 730,000 shares:

<TABLE>
<CAPTION>
                                    For              Against           Abstain          Broker Non-Vote
                                    ---              -------           -------          ---------------
              <S>                   <C>              <C>               <C>              <C>
                                    6,243,594        2,837,685         699,056          4,761,728
</TABLE>

   (d)      Ratification of the appointment of Arthur Andersen LLP as our
            independent auditors for the current year:

                                    For              Against           Abstain
                                    ---              -------           -------

                                    13,854,085       75,700            6,265


ITEM 5:     OTHER INFORMATION

                    None

                                       20

<PAGE>

ITEM 6:     EXHIBITS AND REPORTS ON FORM 8-K

       (a)  Exhibits

                None

       (b)  Reports on Form 8-K

      The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended September 30, 2001.

SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                   TVIA, INC.

November 13, 2001                   By:          /s/ Michael Hoberg
                                      -----------------------------------------
                                                   Michael Hoberg
                                               Vice President of Finance,
                                        Chief Financial Officer and Secretary
                                           (Principal Financial Officer and
                                              Duly Authorized Signatory)

                                       21